Strong Q2 Data Puts Georgia's Annual Growth on Track To Reach Target

Georgia’s annual growth rate for 2017 looks set to reach (or even exceed) the Georgian government’s 4% target. According to the preliminary statistics released by GeoStat, Georgia’s real GDP growth was 4% year over year (YoY) in Q2 2017. Based on this data, the ISET-PI forecast model predicts a 5.1% GDP growth in 2017.

Data on the second quarter of 2017 suggests that the Georgian economy is continuing to recover from its sluggish growth of previous years. The recovery is due to improvements in both the domestic and external environment. In particular, improvements in consumer and business confidence, the growth of government expenditure, an increase in loans, hikes in exports of goods, rising tourism, and increased money transfers were the main drivers of economic growth in Q2 2017. On other hand, weaker-than-expected FDI inflow hindered growth in the reported period.

In addition, high economic growth rates in neighboring countries were benefitting the Georgian economy. Both Armenia and Russia showed high annual growth rates of real GDP in Q2 2017, while Turkey is expected to reach 6% growth. Only Azerbaijan exhibited relatively weak economic performance, down by 1.3% in the first half of 2017.

Let us take a look at some of the main drivers of economic growth in Georgia in Q2.

Tourism

The rise of tourism was one of the main factors which accelerated economic growth in Georgia in Q2 2017. During this time, Georgia hosted 1.730 million international arrivals - a 15% year-on-year increase;

Real tourists (visitors who stayed in Georgia for 24 hours or more) constituted 46.0% of total arrivals (796,339 people), a 31.3% increase from the year before. Of the top five source markets Armenia (+16.9% YoY), Azerbaijan (+10.9% YoY) and Russia (+27.2% YoY) each showed double digit growth.

Iran (+212.9% YoY), Saudi Arabia (+209.8% YoY), Uzbekistan (182.2% YoY) and India (+120.3% YoY) were the source markets that made up the largest increase of international visitors.

Georgian citizens were also actively travelling abroad. In Q2, the number of outgoing citizens in the reported period constituted 968,952 people, which was a 9% YoY increase. There was a 37.2% increase in the number of Georgians who left the country by air, which means that visa liberalization regime with the EU already boosted tourism to Europe.

Consumer and Business Confidence

The Consumer Confidence Index (CCI), a barometer of consumer sentiment and a guide to domestic spending, was slightly higher in Q2 than in the same period last year – an increase of 1.9 index points. The present situation index was also affected positively in that period, up by 3.3 index points; while expectations fell by 0.6 index points.

The Georgian Business Confidence Index (BCI) also showed positive changes in Q2 2017, reaching 29.0 index points, which is a 2.6-point improvement YoY. The second quarter increase in the BCI was mostly driven by strong performance in the last quarter and a quite significant improvement in expectations. The expectations index gained 13.2 index points, rising to 63.1, which is the highest value in Georgia’s BCI history (see the full BCI report here).

External Trade

The second quarter of 2017 continued to show positive dynamics in external merchandise trade. Trade turnover increased by 9.4% year over year. This rise was mostly driven by a notable increase in exports (+30% YoY), while imports were almost flat (a 3.8% YoY increase to 1,875 million USD). As a result, the trade balance of the country has improved, with the deficit shrinking by 6.4% YoY.

The boost in export volume was driven by improved external demand conditions and a surge in metal prices.

Export of copper ores and ferro-alloys increased by 84.9% and 52.6% YoY respectively, contributing 15.7 pp to the total.

Wine (+46% YoY), cars, (+32.5% YoY) and petroleum (+505.8% YoY) were the other main drivers of the export surge in Q2.

Exports to CIS countries increased by 62.8%. Exports to EU countries increased by 17.6% and those to other countries rose by 12.5% YoY in Q2. The main contributors to export growth were Russia (+114.2% YoY) and China (+77.5% YoY), which became the largest destination countries for Georgian products. Together with Azerbaijan (+ 5.4% YoY), those countries contributed 21.4 pp to total export growth in second quarter of 2017.

Foreign Direct Investment

According to Geostat’s preliminary estimates, FDI in Georgia amounted to 346.3 million USD in Q2 2017, a 14.8% YoY decrease. The top five source countries by share of total FDI were Azerbaijan (36.6%), the Netherlands (12.4%), Turkey (11.3%), the UK (9.1%), and the Czech Republic (6%).

In Q2 2016, transport and communications was the largest FDI recipient sector, receiving 130.4 million USD (37.6% of total FDI), while the construction sector followed with 70 million USD (20.2%).

Financial Sector

Credit activity improved in the second quarter of 2017.

Looking at the flow of loans, during Q2 2017, commercial banks granted 36.7% more loans than in the same period a year ago. Of that amount, only 34.6% (32.6% excluding the exchange rate effect) were granted in foreign currency – a huge drop from the 48.9% recorded in 2016.

The flow of deposits during Q2 2017 increased by 55% YoY. Traditionally, depositors prefer to save money in foreign currency and the dollarization of deposits stood at 74.7% (73% excluding the exchange rate effect), which was a significant reduction compared to the 82.3% figure from Q2 last year.

This indicates that the de-dollarization policy implemented earlier in year has started to work. It is, however, impossible to assess the results of this initiative over such a short period of time. Despite the willingness of banks to obtain funds in the national currency, there are high risks of a currency mismatch in balance sheets due to the increasing difference between the dollarization rates of loans and deposits.

Remittances

According to the NBG, the volume of total remittances to Georgia amounted to 338.9 million USD in Q2 2017 – a 17.6% YoY increase that served as a good indicator of improved external conditions. All primary source countries of money inflows to Georgia showed a positive annual change: Russia (+14.5% YoY), the United States (+16.6% YoY), Greece (+1.9% YoY), Italy (+11.1% YoY) and Israel (+102.2% YoY). The latter continued to show unprecedented growth as a result of the waves of Georgians who stayed in Israel illegally after finding it to be a very good country to live and work in, and who then send money to their homeland.

While money inflows have not yet recovered to 2014 levels, the lari YoY depreciation boosted the purchasing power of remittances. In Q2 2017, Georgian receivers of remittances got 20.6% more of CPI adjusted GEL than in the same period last year, and 10.5% more than in Q2 2014. The biggest portion of remittances most likely goes into consumption, which has a positive influence on internal demand.

Inflation

Inflation was the underlying economic indicator that consumers and producers alike were worried about in the second quarter of the year. According to Geostat, producer and consumer prices increased on average by 10.7% and 6.6% respectively in Q2. The annual hike in prices was mainly caused by one-time factors, specifically the significant increase of excise tax on fuel and tobacco products. However, in Q2 2017 two additional factors put pressure on transportation prices in Georgia:

a) The price increase of oil products on the world market. On average, fuel prices (IMF fuel index) increased by 12.7% YoY.

b) Nominal depreciation in annual terms. Despite the trend of monthly appreciation against the US dollar since January 2017, the Georgian lari lost on average 6.1% against the USD year on year.

As a result, prices on transport and tobacco increased by 16.8% and 15.9% respectively. Taken together, these products contributed 3 percentage points (pp) to annual inflation in Q2.

The biggest driver of annual inflation in this period was the price change on food products, which rose by 8.5% YoY (2.6 pp) and was also affected by higher fuel prices. Supply side pressures will keep annual inflation above its target level (of 4%) during 2017 and, holding other things constant, inflation should return to the 3% target in 2018.

Exchange rate

In Q2, the lari nominal exchange rate appreciated on average against both the US dollar (7.3%) and the euro (4.4%) compared to the first quarter of 2017. The quarterly appreciation was caused by positive dynamics in exports, money inflows and tourism. However, in annual terms the lari was down against these currencies, by 6.1% and 3.6% respectively.

The real and nominal effective exchange rates followed the same pattern, seeing a 3.6% and 4.6% quarter-on-quarter increase respectively, while they depreciated in annual terms.

During this period, the National Bank of Georgia bought 70 million US dollars in seven auctions. The same pattern, albeit at a greater scale, was observed in the same period last year, when the NBG bought 203.35 million USD to smooth the national currency appreciation.